If you’ve recently started an e-commerce business, one of your tasks is to learn the basics of accounting.
The first part of accounting is calculating your online revenue. It’s important to know exactly how much you’re bringing in to be able to track certain key performance indicators (KPIs) that are measures of how well your business is doing.
Here we’ll discuss the best ways to calculate your online revenue.
Understanding Online Revenue
Online revenue in basic terms is the amount of sales in GBP that you bring in from your online product sales before deducting any expenses including your cost of goods sold.
That number is your gross revenue, but you can also calculate net revenue. Net revenue is your sales less any discounts offered, affiliate commissions, or returns.
You may also have other revenue, which is money that you bring in that’s separate from your product sales, such as ads on your site or affiliate marketing revenue.
Calculating Your Online Revenue
To calculate your gross revenue, you’ll simply take the number of sales you make multiplied by the item price. If you have more than one product, you’ll calculate your gross revenue for each product. When you add up the gross revenue from each product, you’ll have your total gross revenue.
So, for example, say in one month you sell 100 units of product one for £20 and 200 units of product two for £50.
Your gross revenue for product one is 100 x £20 = £2,000. Your gross revenue from product two is 200 x £50 = £10,000. Therefore, your gross revenue is £2,000 + £10,000 = £12,000.
But say you were having a sale, and 50 of your units of product one were sold at a 10% discount, and 50 of your units of product two were sold at a 15% discount.
That means that your total discount offered on product one was 50 x (£20 x 10%) = £100. Therefore, your net revenue for product one was £2,000 – £100 = £1,900.
Your total discount on product two was 50 x (£50 x 15%) = £375, so your net revenue for product two was £10,000 – £375 = £9,625.
Your total net revenue is thus £1,900 + £9,625 = £11,525.
You should track your revenue on a monthly basis to see if your numbers are improving over time. You can calculate your revenue growth rate using an online revenue growth calculator. Your growth rate is one of your KPIs. If your revenue is not growing month after month at a good rate, you should look for factors that could be negatively impacting your revenue and find ways to improve.
Factors Affecting Online Revenue
Many factors impact your online revenue. First of all, clearly, your website traffic is number one. How many visitors are you getting to your site per month? If you’ve found that your revenue decreased in a particular month, you need to see if your traffic also decreased. That tells you that you need to step up your SEO and other marketing efforts to increase your traffic.
Website traffic, just like revenue, should increase month over month.
Another factor to analyse is your conversion rate. How many of your visitors make a purchase? Again, you need to monitor this rate on at least a monthly basis and see if it’s increasing or decreasing with your revenue. If your conversion rate is low or decreasing, you need to take a look at your site to figure out why. Can your product descriptions or images be improved? Can the purchase process be simplified?
Look at your site from a customer’s perspective to see what you can improve.
Also examine your pricing strategy. If your conversion rate is low and you can’t identify any other reasons, your prices may be too high. Examine your competitors’ prices to see where yours stack up. If others are selling the same products for less, you may need to consider lowering your own prices.
On the other hand, if your web traffic and conversion rates are good, but you want to increase your revenue, you may be able to increase your prices. Be careful when doing so though. Again, check competitor prices to make sure you don’t price yourself out of the market.
Finally, examine your customer retention rate. Are people coming back to purchase again? If not, you may need to keep in touch with your customers more by sending emails or texts about new products or special offers. You could also consider some type of rewards program so that customers get a special discount or reward after making a certain number of purchases.
Gross and Net Profit
Your revenue numbers are only part of the equation. You also need to calculate your gross and net profit. Gross profit is simply your net revenue less your cost of goods sold. So, if you purchase product one for £10 and sell it for £20 with no discount, your gross profit on the item is £10.
You can increase your gross profit by either finding ways to source your products for less or increasing your prices.
Net profit is your profit after deducting all your other expenses for the period such as software costs, hosting costs, labor costs, or shipping costs.
At the end of each period, usually monthly, you’ll do the following calculation.
- Discounts and affiliate commissions
= Net revenue
- Cost of goods sold
- All other expenses
= Net profit
Your net profit is essentially how much cash you have in your pocket after you pay all expenses.
Finally, you’ll calculate your net profit margin which is your net profit divided by your gross revenue. So, if your gross revenue for the month was £15,000 and your net profit was £5,000, your net profit margin is £5,000/£15,000 = .33 or 33%. So, what do you do with that number? You need to check average net profit margins in your industry to see if you are above or below the norm.
If you’re below the norm, you need to look at ways to either increase your revenue or lower your costs. If you’re above the norm, then celebrate! Either way you need to monitor this number regularly to make sure that it’s where it should be.
It’s very important to monitor your revenue and your profits on a continuous basis so that you can analyse and manage them. Your goal is to improve them over time, so to be successful you always need to know where your numbers stand and take action to improve them. Doing so can help you to grow your business to the next level.
Source: Mrs MummyPenny.